1% of nothing

Today I learned about an organization, 1% of Nothing, that encourages brand-new startups to donate 1% of their stock (currently worth $0) to a charity of their choice. If they hit it big they can make a huge impact on the nonprofit without having a significant impact on their own bottom line. If they fail… no harm done. Worth considering:

http://1percentof.org/

2011 was a banner year for the River Valley Investors

2011 was a banner year for the River Valley Investors. But it didn’t start out that way! In fact, the group was looking at very unfavorable trends.

In the summer the group began a months-long process of reinventing our processes. We hit the ground running in September with our new systems and… have been delighted by the results. In those four months we generated…

• 3 new investments, doubling our number of investments for the year and beating our prior record of 4 investments in a year.
• Decreased due diligence time (but not quality) to 2-3 months, a 2-3x speed increase!
• Dramatically increased the quality of fit of presenting companies, providing better value to entrepreneurs and our angels.

In the near future I’ll share some of the techniques we’ve been using. None of them are rocket science, but finding the right ones and executing them well has proven all the difference.

My thanks to all of these people for helping make these results possible:

• My right-hand at RVI: Corey Silva
• RVI’s chairman: John Kole
• RVI’s active members for pitching

Congrats to Vayu Vest, TV coverage :)

Congrats to a former students of mine (and the UMass Amherst Entrepreneurship Initiative) for getting on TV . This is a nice interview with the co-founders Brian Mullen and Chris Leidel.
About the company: The Vayu vest is a new and medical device that uses deep pressure therapy—a sensory-based intervention which has been observed to relieve anxiety, reduce self-injurious behavior, and increase focus for individuals on the autism spectrum.

Watch the video (7 min)

Prediction-market powered commenting?

Commenting on the internet has hardly evolved in 15 years, much to all of our chagrin! First, a quick review of the problem: lots of people post comments to popular content sites. Sadly, it is far too easy for jerks/trolls, extremists, and crazies to screw up the conversation for everyone. Using software to analyze if a comment is appropriate just doesn’t work. So people tend to rely on two flavors of solution:

1. Handful of moderators, most of whom usually work directly for the website.
2. Let the crowd vote up or down individual comments.

Solution 1 is not scalable, is expensive, and opens the site to claims of bias.
Solution 2 sounds good in theory, but sometimes crowds become mobs that vote for things the website owners aren’t so happy about.

So what if we used prediction markets instead? Here is (roughly) how it might work.

* All commenters are provided 100 "reputation points" when they create their accounts.
* When a commenter sees a post, they can bet some of their reputation on if the post will be removed (or not) within 48 hours of the post going live on the website.
* The website’s own moderators focus their attention only on posts that garner attention from the crowd. Moderators then decide which of those posts should be removed.
* If a post lasts the full 48 hours, anyone who bet that it would de-listed loses their reputation points. People who bet that the post WOULD be de-listed GAIN reputation points.

The traditional system of asking people to bet up or down simply gives everyone (nice people, rational people, jerks, and irrational crazies) all the same voting weight. But if you make commenters place a bet on what the moderators will do – then regardless of the commenters’ biases the rational ones will bet the right way. And the rational ones will therefore earn more and more reputation points, allowing them to make larger and larger bets, and so have a larger impact on which posts should be delisted. It rewards success. Meanwhile, irrational commenters lose reputation, decreasing their influence on the process.

This allows the website to maintain quality via their in-house moderators, but to allow those moderators to be far more scalable by leveraging the widsom of the crowd.

Could this be easily prototyped as a WordPress Plugin?

Due diligence best practices

Frank Peters did a great podcast years ago, Doin’ Due Diligence, which he kindly reposted, summing up best practices in due diligence and viewed by three angel investors with over 100 deals of experience between them. Highly recommended for those new to angel investing or seeking angel financing for the first time.

Frank Peters’ All About Angel Investing

I just shared this email with members of my angel group and I am hopeful it will be of benefit to some of my readers as well…

Dear members, TheFrankPetersShow, the top podcast on angel investing, kindly created a 4-part series on best practices in angel investing. It is an excellent overview with a relaxed, informal style. I thought some of you, especially our newer members, might find this enjoyable:

• Part 1: http://thefrankpetersshow.com/podcasts/mp3_files/FP354-Barach-Phillips.mp3
• Part 2: http://thefrankpetersshow.com/podcasts/mp3_files/FP356-Barach-Phillips.mp3
• Part 3: http://thefrankpetersshow.com/podcasts/mp3_files/FP357-Barach-Phillips.mp3
• Part 4: http://thefrankpetersshow.com/podcasts/mp3_files/FP358-Barach-Payne-Phillips.mp3

EI Concept Competition Video

This semester’s UMass Amherst Entrepreneurship Initiative’s Concept Competition was lively and, for the first time, recorded!

About the finalists:

• Samuel del Pilar of Sneakers for Success
• Brooke Renée of TheCoutureCook.com
• Melanie Black of Yoga With Mel
• Anthony Arena-DeRosa of Social-Lite
• Kevin Morde of Dragonfly Amplification

View video of the competition – pitches, audience Q&A, judge’s feedback, and more (kindly recorded by Hadrien Dykiel)!

Convertible notes: pros and cons

Yesterday I was speaking with an entrepreneur with an exciting company and terms structured as a convertible note. Convertible notes are non-starters for my angel group, as they are for many (though certainly not all) other groups. Why?

Convertible notes have numerous advantages, the biggest being lower legal expenses while dodging the emotionally and intellectually infuriating valuation fight for early-stage companies.

But it is the disadvantages that bother my angels. Some of the biggest being:

• If you look at the internal rate of return from the time of signing the note to when it converts, it is usually dramatically lower than the 60% equity investors are targeting – despite the fact that note investors are usually the ones taking the most risk.
• If the note signers help the company explode between now and the series A, they get the same benefit as if they did nothing to help grow the company. This can be mitigated somewhat by a cap… but only somewhat. In other words, the note does not align investor and entrepreneur interests .
• All old terms are always up for negotiation when new investors bring in new money. But de-facto, my (admittedly anecdotal) queries show that new investors have much more success negotiation down terms from notes than terms from prior equity rounds.

That’s my take.

Here are some others who also dislike convertible notes:

• Xconomy wrote up a detailed piece on reasons why entrepreneurs might want to avoid convertible notes here.
• Don Dodge, a respected member of the Northeast angel community had this to say.
• Basil Peters, a nationally recognized thought-leader in the angel community isn’t a fan either.

If folks know of some people who do like these notes, please let me know so I can fairly link to them. A quick search for me came up empty.

Pre-screening today (11/7)

I find that when entrepreneurs "see how the sausage is made" is helps them design their own documents and presentations to get through the gauntlet. Today I am pre-screening new deals coming into my angel group.

"[CompanyName] is a cloud-based video interviewing platform for employers and job candidates… The Company adds a filter into the hiring process between the resume review and the in-person interview and facilitates targeted, asynchronous (not-live), under-5-minute interviews that employers review at their convenience."

The text they used doesn’t stand out much for me (bad). They included a professionally produced video that is essentially a product demo, category evangelizing, and throws in some credibility by showing some reputable startup folks saying nice things (good). Affiliated with some high-credibility incubators/accelerators (good). There is more than enough credibility here for me to bounce it by a few of the people in my group. Time: 3 minutes. Decision: Bounce by specific people in the angel group.

"Centralized repository for healthcare providers to store, manage, update, comply, and share their licensing and credential documents online… We allow providers the capability to store all of their credentialing paperwork online, while we manage and update their information. Our automated notification system will notify providers of when they have obligations coming due and if their information is about to lapse. We also allow open communication and secure e-document transfer between the provider and their affiliated facility and staffing agency to minimize all party’s risk exposure."

I am not an expert on this space, but their story about the problem and their solution sounds credible (good). Market seems large enough, even though it is only implied by the text (good). I don’t have many people with the right expertise (bad). Time: 30 seconds. Decision: Bounce by specific people in the angel group

"[CompanyName] is developing [chemical] a patented oral nonpsychotropic synthetic THC derivative for the treatment of life threatening scleroderma… [CompanyName] is leveraging $20M in prior investment in [chemical] and $400K in prior angel/founder financing to develop [chemical] for a scleroderma (SSc), a life threatening disease. As a result of expected fast track status for SSc and low fixed overhead costs, [CompanyName] believes it can complete a phase II POC trial in scleroderma for less than $1.75M and a pivotal phase II/III trial for less than $15M total. The company will seek exit opportunites at each milestone."

This is a pharma play – those TEND to be very capital intensive (very bad) and have long times to exit (bad). This company claims they are different. I have almost zero pharma experience in my group (bad). This deal is affiliated with another angel group that has more domain experience. Time: 30 seconds. Decision: If another angel group invests and wants to syndicate, reconsider. Until then decline.

US bill tries to legalize crowdfunding

Today I learned of a house bill aiming to legalize crowdfunding for for-profits. 80 years ago there were frauds walking around convincing people to invest in their bogus ideas. A lot of decent people lost a lot of money. To try and stop this, the US government passed laws meant to protect unsophisticated investors from these folks. In theory this sounds great. The problem is… how do you define "unsophisticated?"

I will grossly over-generalize here: the US government decided to essentially define it as "not rich." So, anyone who has a lot of money is assumed to know what they are doing and can invest in startups with few restrictions. Folks who aren’t rich face more restrictions. And so the not-rich are protected from loosing their money… sadly they also lose the opportunity to MAKE money. And we loose the benefit of the wisdom of that crowd!

The power of the internet is now allowing crowdfunding – lots and lots of small checks from lots and lots of people adding up to a big pile – but our legal code essentially forbids crowdfunding of for-profits. What if we could unleash that potential? There are obvious benefits (and risks). In general, I’m in favor. What about you?

Hat tip to Jason Calacanis.